Statement at the Conclusion of an IMF Staff Mission to Sri Lanka

Press Release No.09/443
December 4, 2009

The following statement was issued on November 20, 2009 in Colombo at the conclusion of an International Monetary Fund (IMF) staff mission to Sri Lanka:

“An IMF mission led by Mr. Brian Aitken visited Colombo during November 11-20, 2009 to hold discussions on the second review of the US$2.6 billion Stand-By Arrangement, approved on July 24, 2009. Completion of the review would lead to disbursement of the third tranche of nearly $330 million under the program. The mission met with officials from the Central Bank, the Ministry of Finance & Planning, and other government ministries and departments, as well as representatives of the private sector and civil society.

“Economic developments have been more favorable than expected at the time of program approval in July. Confidence has improved and output growth is showing signs of picking up. Foreign investor enthusiasm remains strong. Garments exports are stronger than expected, and import growth is starting to increase. The recent decline in interest rates should support higher growth in 2010. With economic activity well below Sri Lanka’s potential, inflation is expected to remain in single digits next year.

“With gross reserves now at more comfortable levels, the risk of an imminent balance of payments crisis is no longer present. This improved situation provides the space for the government to carry out policy reforms that will address the economy’s vulnerabilities, accelerate reconstruction and resettlement, and lay the basis for strong future growth.

“The government’s economic policies have so far been in line with the program. All end-September targets were met. Monetary growth is picking up as expected, and the central bank’s actions to rebuild reserves while reducing policy interest rates are appropriate. Actions are being taken toward tax reform—the Presidential Tax Commission’s work is progressing, and the Commission’s final recommendations are expected to be ready in time to provide an input into the full-year budget for 2010, to be submitted to the new parliament next year.

“Looking forward, the government has reiterated its commitment to the policy measures laid out in its Memorandum of Economic and Financial Policies, including meeting future targets for net reserves and taking additional steps to strengthen the financial sector. Achieving the government’s targets of reducing the underlying budget deficit—before accounting for grant-financed spending and excluding provisions for reconstruction-related project spending—to 7 percent of GDP in 2009, and further to 6 percent of GDP in 2010, will be challenging, but these fiscal targets remain within reach.

“The mission discussed with the authorities progress on resettlement and reconstruction. A framework for accommodating higher reconstruction spending within the program was agreed with the 2010 fiscal targets adjusted to allow for increased foreign financing of these projects.

“The IMF team will now return to Washington and monitor developments over the coming weeks to determine whether adequate progress has been made for the staff to recommend completion of the second review of the Stand-By Arrangement to IMF Management and the IMF Executive Board Staff envisage that, if such a recommendation were to be made, the Board could consider the review sometime early in the first quarter of 2010.”